yanswersblog.com/index.php/archives/2008/09/19/ask-mike-what-caused-the-great-depression -> yanswersblog.com/index.php/archives/2008/09/19/ask-mike-what-caused-the-great-depression/
askmike ask mike avatar Hey Guys, The financial mess on Wall Street is all anybody seems to be talking about these days. Some are even wondering if we could be entering another "Great Depression."
During the 1920s, wealthy Americans whose income was among the top 1%, saw their disposable income rise 75%. Not exactly a level playing field and certainly not a sustainable figure. Everybody was playing, but there weren't very many rules.
Add a comment 1 I think it just reinforces the wisdom of diversification. I like a nice blend of high-risk, blue chip, and low-risk investments, in lots of different venues. Single investment choices may occasionally make you more money, but it does nothing to equalize your losses. Comment posted on September 19th, 2008 at 5:31 pm by kaththtea 2 I'm more cautious. Despite low unemployment across the board, some counties where I'm from have unemployment figures as high as 10-15%. I've also seen the stories about the tent cities that are eerily reminiscent of the Hoovervilles of the 20's to me. I'm actually pretty nervous about at least the next couple of years. On the other hand, I'm glad the days of responsible lending may have finally come again. Comment posted on September 19th, 2008 at 5:35 pm by jaku 3 To be honest, I consider myself now more stupid- I don't understand much of what happened... Comment posted on September 19th, 2008 at 5:42 pm by Kyoto 4 For the stock market, it's a good time to buy long-term stocks, and a bad time to sell, for the most part (my husband met with a financial advisor today). Comment posted on September 19th, 2008 at 6:03 pm by Lisa 5 Both the lack of liquidity and the Federal Reserve was not acting fully as the "lender of last resort". Interestingly and contrary to popular belief, FDR's New Deal did not fix the problem. Numerous studies and complex analysis of statistics have shown that changes to banking regulations did the most to improve the economy. The new banking regulations provided much needed liquidity. Comment posted on September 19th, 2008 at 6:04 pm by Anonymous 6 The day before the Federal and Treasury officials announced that they are going to bail out Freddie Mac, Fannie Mae and AIG was the best time to buy stocks since they were at rock bottom prices; We saw a huge surge in prices last Friday, September 19, after the announcement were made on AIG. Shrewd investors do not normally buy and sell on a daily basis and always keep a portfolio of healthy stocks that regularly provides cash and/or stock dividends and other stock options. They also have a sizeable cash on hand for times like these. I am willing to bet that there is a number of investors that made a killing on the exchanges last Friday. Some might still be holding back a percentage of their purchased stocks until Monday awaiting a follow-through of Friday's climb. Smart investors are usually aggresive but also cautious in the sense that they know which and when to buy, and which and when to sell. Can you imagine if someone with inside information about AIG's bailout invested $1 million in stocks last Tuesday and Wednesday and unloaded the same last Friday? Comment posted on September 19th, 2008 at 6:20 pm by Andrew Ramoso 7 I think you're missing the parallels. IE: Lehman Brothers, IndyMac, etc) 3 - A horrible Drought (parallel: If you look back in time, you'll see that the current bubble burst started with Hurricane Katrina... Several disastrous hurricanes in 2005 caused a "pause" in the Real-Estate markets in the fastest growing areas: Florida (especially), Nevada and California were particularly hard-hit. This pause was enough to start a minor panic which grew into the wide-spread real estate crises that we see today. Many think that the real estate crisis that we see today is a direct result of the sub-prime loan crises but really it's the other way around: This country has seen a loss of value in the dollar consistently since 2001 with an uneven stagnation of income increase. Most American's, to make up the difference, have been living off their home's growing equity to maintain the lifestyle they were accustomed to. For example: A family making $50,000 per year living a $50,000 per year lifestyle in 2001, found that lifestyle costing them $60,000 in 2002 (even though their income may only have been raise to $55,000 or not at all). Many of those families turned to the equity in their home (through either refinancing or taking out new equity lines) to supplement their income so that they could maintain that lifestyle. Of course, in 2002, this probably was compounded and so on and so on until, when that same home-owner went to get that supplemental "income" in 2005, 2006, 2007, etc and found that now, they no longer had any equity, more and more of those homeowners could no longer afford their mortgage payments and foreclosed. The banks who now owned those foreclosed properties were quick to short-sell them in a fire sale manner (at 80%, 70%, or sometimes even 50% of the current market value) causing everyone else's equity to fall accordingly creating an even bigger problem. Add a Fed who continued to lower rates to make this even more enticing, more creative financing from the banks (negative am products and ARMs and lowering the bar to the ground on who could qualify) and this made an already unstable market like a brick house made on a paper foundation (excuse the pun). Those self-employed (arguably a significantly larger percentage of the work market especially when you consider many companies "contract" out now where they used to have "employees" saving themselves great expenses in benefits and unemployment insurance) who are "out-of-work" do not count in this number. I'm not really a doom and gloomer (I know I may sound like one) but I think it's important to see the mistakes we have made and learn from them. Recession and Depression (defined by the economist) are (in most cases) discussions of GNP and by-the-book definitions exclude us from both for the time being. But the impact on consumer confidence and the continued trickle-down effect throughout the economy will not change until someone, somewhere (in the public eye) acknowledges that we're having problems and need to do something about it... Unfortunately, it took a Presidential election to do that (which in and of itself is a sad commentary on our own humanity). If you're in to such things, Napoleon Hill in his book "Think and Grow Rich" blames a great deal of the Great Depression on a master-mind of gloom and doom perpetuated by the media. He argued that this created a downward spiral of all of the things you spoke of, each feeding one another and fueled by the media exploiting the misfortunes of those "fallen victim" of the times (thus creating a greater stress on market confidence and so on and so on). I think there is some validity to this theory as well so I want to be careful to point out that I don't want to perpetuate this. The best way out of this (which is not the current path we are taking with all these government bail-outs) is to get back to basics economically starting at home. Work for what you make, don't spend more than that and let your demand (what you can afford to buy) effect market pricing rather than printing more funny money when you can't afford the demanded price. If buying would have slowed down a little back when this all started, it would have caused a minor recession, sure, but we would have been long recovered by now and back on track. By the way, I'm not an economist (which may be obvious, I don't know) - just a regular working Joe like everyone else. Comment posted on September 19th, 2008 at 6:20 pm by Paul 8 We are currently seeing bank failures, insurance company failures, stock failures, mortgage failures and an increase in unemployment. The only thing that's keeping our economy from falling apart right now are the government bailouts. Unfortunately, the US is having to borrow the money from other countries to finance the bailouts as the US is seriously in debt. This, in turn, will seriously impact the value of our dollar which is already worth much less than the euro. My personal belief is that...
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